I am a professor of economics at The University of Georgia and consultant on economic issues to a variety of corporations and local governments. Taking a generally free market, libertarian perspective, I use economics as the lens to analyze government policies from the local to the international level. I have a particular focus on government policies that strive to redistribute income or wealth either openly or in indirect ways. A lot of those thoughts are collected in my e-book, Ending the Era of the Free Lunch.

10 Essential Economic Truths Liberals Need to Learn

Today’s political climate is highly partisan. Debates are full of personal attacks, harsh words, and complete disagreements as each side clings tightly to strongly held beliefs. Part of the difficulty in reaching the compromises necessary to get things done in Washington is that the two parties believe so many opposite theories with each side sure that their opinion represents fact. With that in mind, here are ten economic facts that liberals need to learn.

1) Government cannot create wealth, jobs, or income. Because government has to take money from somebody before it can spend it, there is no economic gain from anything the government does. Money collected in taxes or borrowed would have been either spent or invested in the private sector. Any jobs government claims to have created are only in place of other jobs the same money would have produced if people had been allowed to spend it themselves.

2) Income inequality does not affect the economy. Poor people do spend more (or all) of their income while people with higher earnings save some of their income. However, saving is as good for the economy as consumer spending (or better). The basic identity is that national income equals consumer spending plus investment plus government spending on goods and services plus net exports. To make investments, money first must be saved; so savings contribute to national income, too. In fact, savings that lead to increased capital (a company borrows it to build a factory, for example) will lead to higher national income in the long run because the capital can produce income year after year.

Photo credit: 401(K) 2013

3) Low wages are not corporate exploitation. In a free country, people voluntarily accept employment, so all workers believe their current job to be the best choice from among their opportunity set. If a business paid its workers much less than they were worth, a competitor would offer more and hire them away. As consumers, when we go shopping, we are happy to find low prices. We certainly do not go out of our way to pay more than we need to for things. Businesses are the same when they are buying labor; they do not pay more than they need to pay. Businesses exist to make profit, so a business will not, and should not, pay its workers more just because it has the profits available to do so. Workers get paid more only when they become more productive or when the price of what they make goes up.

4) Environmental over-regulation is a regressive tax that falls hardest on the poor. When we reduce pollution more than we should, worry about climate change more than we should, or over-restrict access to natural resources, prices go up. Because the poor spend a higher percentage of their income, forcing up prices is a bigger penalty on the poor. Blocking the Keystone XL pipeline is a perfect example of how environmental extremists are causing energy prices to be higher.

5) Education is not a public good. We provide publicly funded K-12 education to all (even to non-citizens), but the education provided produces human capital that is privately owned by each person. This human capital means more work skills, more developed talent, and more potential productivity. People with more human capital generally get paid more, collecting the returns from their education in the form of higher earnings. One common defense of education as a public good is worth refuting here. Yes, education helps people invent things that benefit society. However, they will expect to be paid for those inventions, not give them away for free in return for their education.

6) High CEO pay is no worse than high pay to athletes or movie stars. Yes, CEOs are paid a lot, maybe too much. The top professional athletes, television and movie stars, singers, lawyers, and hedge fund managers also all make lots of money. High CEO pay does not reduce the pay average workers get any more than high athlete pay means that the equipment manager gets paid less or the roadies on a Rolling Stones tour make less when the Rolling Stones make more. The high pay of CEOs, movie stars, and athletes all come out of the pockets of the owners of the business, movie studio, and team, respectively. Such pay reduces profits, but not the pay of other workers who are paid what they are worth in the marketplace. Shareholders have a right to complain about CEO pay, but other employees and labor activists do not.

7) Consumer spending is not what drives the economy. An extra dollar of investment, government spending, or net exports adds just as much to GDP as does a dollar of consumer spending. In fact, until recently, consumer spending was 65 percent of GDP (find an old economics textbook and look it up for yourself). Then, as savings fell beginning in the 1980s and consumer credit became more widely available and less expensive, consumer spending rose to 70 percent of the economy. This is actually a bad thing. Robert Solow, who won a Nobel Prize in Economics, showed that nations are the wealthiest in the long run if they save a share of their income known as the Golden Rule Savings Rate. This is tricky to estimate, but all economists are sure that the U.S. is well below it. So if we save more and spend less of our income, our children and grandchildren will be better off.

8) When government provides things for free, they will end up being low quality, cost more than they should, and may disappear when most needed. Public education, free health care, welfare programs; does anybody think these programs are high quality, reliable, and have no waste in their budgets? Most states fund the majority of their technical and community college programs. Thus, in the recent recession, right when lots of people wanted to get some new job skills, technical and community colleges had to cut their budgets and offer fewer classes. The freebie disappeared at just the wrong time. The sad reality is: when the customer does not pay, the product is rarely any good.

9) Government cannot correct cosmic injustice. Esteemed economist Thomas Sowell wrote a fabulous book on this topic. Nobody likes to see cosmic injustice: kids with serious health problems through no fault of their own, families whose homes are destroyed in natural disasters, etc. However, when government steps in to correct a cosmic injustice, the price must be paid by someone else—a someone else who had nothing to do with causing the injustice being addressed. Thus, every time government fixes or eases a cosmic injustice, it creates a new one by sticking somebody with the bill—either a financial one or one measured in some other sort of cost. For example, each affirmative action college admission by definition mean some other applicant must be turned down. We may be willing, as a society, to bear an injustice in order to fix some cosmic injustices (e.g., many will willingly chip in to pay for a child’s medical care), but we cannot create a world free from all cosmic injustice.

10) There is no such thing as a free lunch. In America today the number of free lunches being served is at an all-time record high. People on food stamps, households receiving a government check of some kind, the number of people collecting disability, need-based financial aid for college expenses; all either hit highs recently or are at all time highs right now. Yet, somebody is paying that bill; no free lunch is really free. This is true more broadly about all regulations that promise to provide us with something good; the costs are lurking somewhere in the background. Raising the minimum wage does not just take money out of employers’ pockets, but also raises prices for all customers and will cost some low-wage workers their jobs. If we protect voting rights, we get more voter fraud. If we help underwater homeowners, it will be harder for future borrowers to get a mortgage. Sooner or later, those free lunches get paid for and often the bill lands in an unexpected or unintended place.

Liberals love to talk about their compassion. Compassion is great, but no amount of caring can repeal the simple facts of economics. It is fine to support raising the minimum wage, but understand that jobs will be lost and prices will rise. Protecting the environment is a wonderful thing, but it is also expensive and hurts the poor in particular. Politicians love to claim the government spending which they direct creates jobs, but it only moves jobs from one place to another. Greedy businesses cannot exploit workers because another greedy business would be happy to exploit them a little less until greed removed all the exploitation.

Political disagreements are fine and different belief systems can lead to different answers in terms of optimal policy choices. Thus, two people can take the same policy options with the same expected outcomes and arrive at different conclusions about what should be done. What we need to get rid of are the disagreements about the outcomes themselves, as opposed to which outcomes are most desirable. Because everyone is entitled to their opinion, but not to their own facts.

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926 asks, “The government can’t create jobs? I guess the U.S. military doesn’t exist….” ____________________

I suffer from the same delusion that confounds 926. Dr. Dorfman explained to me that if government funds a thing, it can’t be considered investment or job-creation or any other activity that we associate with capitalism. I don’t understand it, but it is not for want of Dr. Dorfman’s patient efforts to break through:

I was not capable of understanding his explanation then, and my mind has certainly not improved any more in that direction since. But I keep coming back here to the good doctor’s posts, hoping that someone’s mind may one day improve as a result. ____________________

926′s thoughtful comments are appreciated by at least this one, simple-minded, die-hard capitalist.

Shrekgrinch writes, “What part of ‘Any jobs government claims to have created are only in place of other jobs the same money would have produced if people had been allowed to spend it themselves.’ do you not comprehend?” ____________________

Shrekgrinch makes a good point with his question: what is there possibly not to comprehend in that assertion? I can think of nothing unclear or ambiguous there.

A common misconception seems to prevail on the Right, which is that those on the Left are too dense to grasp the most-basic-sounding precepts that the Right puts forward. Those on the Right seem not to grasp that other, more-complex aspects of each issue obtain, to create the Right’s confusion. The Right’s presistent repetition, speaking slower and s..l..o..w..e..r, and louder and LOUDER, sounds merely condescending and, well, stupid.

If you’ll forgive my saying… ____________________

Shrekgrinch himself likely knows that the assertion of the opinion does not make it a fact.

To assert, by fiat, that a statement is a fact, and above question, does not make the statement a fact. I believe that our esteemed host knows this, from his readings in philosophy, during his undergraduate years.

While Shrekgrinch might disagree with any examples I might present concerning jobs that a government has created, that disagreement wouldn’t inherently make my assertions false nor true.

On the other hand, a convenient truism can be constructed out of Shrekgrinch’s premise:

That is, Shrekgrinch might easily assert that every government-created job translated into a net loss of twelve-million jobs that might have been created “if people had been allowed to spend it themselves,” And I don’t see how I could prove that assertion wrong.

How about if I say that every fifty-eight-million jobs that government creates take the place of three-and-a-half jobs that the “if people had been allowed to spend it” people would have created it, had they kept their money?

Is one of these hypothetical assertions any closer to truth or fact than the other? ____________________

And if both statements are equally true or false, which one would we prefer: the private people crating twelve-million jobs, or the united government creating fifty-eight-million jobs? Seem like a no-brainer to me.

“A common misconception seems to prevail on the Right, which is that those on the Left are too dense to grasp the most-basic-sounding precepts that the Right puts forward.”

Because generally speaking, it is true.

“Shrekgrinch himself likely knows that the assertion of the opinion does not make it a fact.”

But this time, it is. You can’t count a job created when another is destroyed. You can’t ignore the NET effect of anything because it conflicts with one’s ideological world view.

“While Shrekgrinch might disagree with any examples I might present concerning jobs that a government has created, that disagreement wouldn’t inherently make my assertions false nor true.”

It most certainly does when it conflicts with basic logic.

“Is one of these hypothetical assertions any closer to truth or fact than the other?”

No, because the basic premise that government creates jobs by destroying the capital that creates/sustains them in the private sector has not been disproven.

BUT, you can make the case that a government job can make life easier for the private sector and thus the jobs employed by them in a few instances, like when a federal worker at an agricultural extension office helps a local farmer with setting up a high-tech hydroponics/aeroponics system, for example. Some other job was taken/not created in order for that federal worker to be employed still, but the damage is mitigated because of some of the benefit the worker provides to the private sector.

Yet you never made nor thought of making such a case, did you?

“I wonder what could be so hard to comprehend about that.”

Fantasy thinking is not difficult to comprehends for the Left. Acceptance of facts as proven by reality is, however.

That’s how the GOP works. This article is so sickening. I really hope we get all conservatives out of congress the next election. I used to be a Republican supporter but now that I have followed the economy so closely i see John Alcoholic Boehner running America in to the ground just to make a political point. The military is the only thing that Boehner will support because we need to forget about our neighbors to the south being murdered and help the Jews. I never thought I would be on the other side!

Jeffrey I didn’t realise you were an adolescent libertarian, I’ll be brief but happy to continue if you desire.

1) Government cannot create wealth, jobs, or income Utter rubbish Government does by re-allocating resources and especially by addressing longer term problems that the market cannot

2) Income inequality does not affect the economy Good god man are you such a myopic creature? Apathy, starvation, street demonstrations, riots, just to name a few, remove people from meaningful production and therefore negatively impact on GDP? Heads up, economics although a dismal science is a SOCIAL SCIENCE!!

3) Low wages are not corporate exploitation: mm perhaps not generally but low wages are exploitation and at the very least support broken business models. Example WALMART whose staff get over $!BL in food stamps. Is that not a direct subsidy of wages from the government to the corporation?

4) Environmental over-regulation is a regressive tax that falls hardest on the poor. Ah but I suspect it is you or your ilk that get to decide whether its over regulation. In the meantime our children die of asthma, suffer from allergies and lose the opportunity catch an edible fish in the river near their home. You of course never see this as you reside upon Elysium.

5) Education is not a public good: by that I take it to mean that the benefits of education are privately held and do not flow through society. What absolute bullshit! The more educated people are the better decisions they can make, the more they innovate the more they do a lot of things, including pay tax and in so doing contribute to the greater good. Moreover you’re an American, how can your land and people be truly free if the populace is not healthy and educated?

6) High CEO pay is no worse than high pay to athletes or movie stars: the only correct statement that you’ve made so far but then nobody said anything differently. Why did you need to put it in?

7) Consumer spending is not what drives the economy: Au Contraire it does but when easy credit artificially inflates consumer spending and erodes assets at the same time we have a problem breaking the addiction. By the way who was selling the “juice” to people? Wall Street???

8) When government provides things for free, they will end up being low quality, cost more than they should, and may disappear when most needed: Well that s just plain wrong, look at the US Education, Health and Welfare systems and compare them to the social democracies such as in Scandinavia, Australia, even Thailand that is supposedly 3rd world. Further evidence of the paucity of your thought can be seen throughout history, however, your statement is most glaringly refute by the rise in “open Source” and “crowd” energy being used. Many Many people working with no reward at all except the achievement. Microsoft has given out the source code to its Kinetic device and applications have flooded in, developers everywhere re-tasking the device from games to even medical research.

9) Government cannot correct cosmic injustice: Damn your good, got me on this one. Trouble is all your saying is the basic premise of economics, wants are unlimited and resources are limited. Guess what? Its called bad luck. You saying government cannot do the impossible doesn’t make you overly smart. Smug maybe.

As for your closing comments, pathetic. They are basic trite economic givens. What you fail to address is the fact that government can and should even out economic disruption and keep the markets FREE (reduce barriers to entry, punish rent seekers, etc etc)

In summary, I suggest you are a normal compassionate human being with feelings, with empathy, not an automaton or a sociopath. So I would ask you these questions.

Why would you want or allow your government to treat people in a way which you personally would or could not?

Why do you accept a system (not a free market) that is structurally unable to address long term problems?

There is an important place for government intervention to ensure the maximum amount of needs and wants are satisfied, especially, in the long term. I find your myopic adolescent view beyond comprehension in its failure to address our society’s needs.

Why the disdain for libertarians? No system, save Capitalism, can boast doing more good for so many. No system, but Capitalism, has lifted more people out of poverty.

“There is an important place for government intervention to ensure the maximum amount of needs and wants are satisfied, especially, in the long term.”

Unless you’ve been in a cave for the last decade, the government has failed to accomplish what you suggest. Poverty is at its highest rate since 1993 despite an increase in 20% in welfare spending.

Why do you accept a system that proves itself (time and time again) incapable of waving a magic wand and reducing a problem when it spends billions on the issue. In 2012, the US spent 13k per person on poverty. That’s 52k for a family of four. What’s your lame excuse for astronomical gov’t spending on the poor failing to produce even a one percent decline in poverty rates over the last three years? Let me guess your solution: spend more and tax more (throw even more money at it)…. Trying more of the same and expecting different results.

“Utter rubbish Government does by re-allocating resources and especially by addressing longer term problems that the market cannot”

And by re-allocating jobs they are destroying wealth/jobs in the process.

You might want to brush up on what ‘net gain’ means.

“Good god man are you such a myopic creature? Apathy, starvation, street demonstrations, riots, just to name a few, remove people from meaningful production and therefore negatively impact on GDP? Heads up, economics although a dismal science is a SOCIAL SCIENCE!”

Spoken like someone who doesn’t understand economics.

” mm perhaps not generally but low wages are exploitation and at the very least support broken business models. Example WALMART whose staff get over $!BL in food stamps. Is that not a direct subsidy of wages from the government to the corporation?”

It is not Wal-Mart’s fault that its workers get food stamps just like it isn’t the fault of any other employer who’s workers get food stamps. The fault lies entirely with the government who is giving away the food stamps.

“ The more educated people are the better decisions they can make, the more they innovate the more they do a lot of things, including pay tax and in so doing contribute to the greater good”

All of which is compensated to them for doing so on a private basis.

Again, you need to brush up on what the concept ‘net gain’ means.

“Au Contraire it does but when easy credit artificially inflates consumer spending and erodes assets at the same time we have a problem breaking the addiction. By the way who was selling the “juice” to people? Wall Street???”

Keynesian idiots, that’s who.

“Well that s just plain wrong, look at the US Education, Health and Welfare systems and compare them to the social democracies such as in Scandinavia, Australia, even Thailand that is supposedly 3rd world”

Actually, that really proves the authors point instead of disproving it.

In closing, all I’ve seen in your rant is a pattern of cognitive dissonance that prevents you from using logic and critical thinking skills when presented with empirical evidence that you are wrong. This affliction is typical of Liberals in general, I’ve noticed.

“Unless you’ve been in a cave for the last decade, the government has failed to accomplish what you suggest. Poverty is at its highest rate since 1993 despite an increase in 20% in welfare spending.” That is due to the capitalist model failing again. “Let me guess your solution: spend more and tax more (throw even more money at it)…. Trying more of the same and expecting different results.” Worked from FDR to Reagan unlike your model as austerity, lower taxes and austerity which created the Great Depression under Coolidge, S & L crises of Reagan. Clinton deregulation & free trade with Bush tax cuts created the Great Recession.

“Worked from FDR” Let’s take a regular recession, trow every conceivable government intervention at it so that it may turn into a decade long depression, then blame it on a free market and praise FDR and war for rescuing us.

“Example WALMART whose staff get over $!BL in food stamps…” Another unintended consequence of nanny state attempting to correct cosmic injustice. Oh well, no surprise there. Can hardly blame any business for not rejecting government freebees, who does? After all, it they don’t take advantage of it, their competitors will.

Great piece! These are essential truths! One quibble: in item 1 is dead on but is ignored in item 8. Governments never give anything for free. Whatever any government “gives” is taken, by force, from productive members of the society. The “free” things are not even free to those who receive them because the taking damages the society.

1. Yes it does. Mitt Romney has at least 100M squirreled away in trust funds, doing nothing for the economy. If even 10% of that had been collected as tax revenue, how many more jobs would that have created in the economy?

2. Income inequality is the symptom, not the disease. The real problem is how we’ve shifted the burden of funding a 1st world nation to the poor & middle-class. And when we realize that we can’t actually bring in enough money to do that, we cut, cut, cut. Do you think it’s a coincidence that almost all of our most ambitious public works projects have been funded when the inequality was at its smallest? Do you think we could have funded a race to the moon w/ tax policies we have now?

3. Not exploitive? How else would you describe a job that doesn’t even allow someone to support themselves w/o gov’t assistance? Trying to claim that the negotiating dynamic between low-skilled workers and their employers is fair is like arguing that any deal a firefighter makes w/ a person whose house is burning in the background is not inherently exploitive.

6. I can’t think of a single athlete or movie star who gets paid another boatload of money when their contract is over. When Kobe retires, the Lakers aren’t giving him a golden parachute to help him land softly.

7. Consumer-spending is exactly what drives the economy. Take groceries — every $ used to buy food generates more than a $ in other economic activity. There’s a misguided notion that all money is equal. It’s not. Money spent on necessities by the masses does more for the economy than money spent on luxury items by the lucky few who can afford it.

8. High quality? No, but that’s the sacrifice you make when you make things accessible to everyone. Reliable? Absolutely, when they aren’t being purposely gutted and ham-stringed by people trying to make a show of how much gov’t can fail.

9. Glad you brought up AA… What’s your stance on athletes getting preferential treatment when applying to college? Or the children of large donors? Or legacy admissions? Or boys when the applicant pool skews heavily towards girls w/ better grades?

10. Who thinks there’s a free lunch? Who thinks that these public goods are just manna falling from of the skies? How does someone rationalize calling Democrats the “TAX and spend” party but at the same time claiming that they don’t understand that programs have to be funded?

1) Mitt Romney’s money is not squirreled away, but invested. This creates spending and jobs. When the government takes some away and spends it, that creates jobs. The number of jobs is roughly the same in either case. To the extent that one makes poor decisions or wastes money, you get fewer jobs. My bet is the government produces fewer jobs than Mitt Romney would with the same amount of dollars.

2) Actually the burden of funding the government is increasingly on the rich, not the poor or middle class. The top 10% of earners now pay 70% of all income taxes, meaning the other 90% of people are only paying 30%.

7) When I buy groceries it adds no more to the economy than if I had saved the money in a bank which then lent it to somebody who wanted to open a new coffee shop. Also, it is not whether things are mass-produced or luxury items that matter, but where they are made. American-made luxury items do more for the economy than mass-produced Chinese imports.

10) Lots of people think there are free lunches. When Nancy Pelosi says unemployment and food stamps boost the economy she is implicitly claiming a free lunch. She sees the spending but ignores the cost imposed when that money was taken away from somebody in taxes or borrowed by the government instead of a private sector business.

I love the comment, there is only one problem. It assumes that the person you are arguing with is reasonable. However, Eddie reveals his hand in comment number 8. He implies the one party is somehow responsible for the failures of the gov’t by taking action to undermine the gov’t (as though the gov’t wouldn’t have failed on its own). The problem with such thinking is that it ignores the underlying causes of the failures. In the case of the VA, it was bonuses tied to wait times. For Benghazi, it was political sensitivity. For Bergdahl, it was trying to distract from the VA. For Obamacare, it was just plain and simple incompetence (we spent billions for a system and it just didn’t work). I’m curious to know which gov’t failure he can show a causal link between due to “ham-stringing”.

1. So according to you, the “government cannot create wealth, jobs, or income”, but “when the government takes some away and spends it, that creates jobs…” You see how those ideas contradict themselves?

2. The income tax isn’t the only tax in America, and when all taxes are factored in, the vast majority of all tax payers have a 25-30% tax rate. Complaining that the groups earning the most money also have a bigger share of the tax bill is a disingenuous argument at best.

7. Could a restaurant survive if it only had one family as patrons, even if that family ate there everyday, for every meal? No. One person w/ $100,000 to spend generates much less economic activity than 100 people each with $1,000 to spend, who in turn generate even less activity than 1,000 people each with $100 to spend.

10. Again, this is just not true. A dollar in tax cuts or a dollar in a savings account does less for the economy than a dollar in a cash register. Arguing otherwise is like arguing that getting paid once a year wouldn’t change your total purchases compared to getting paid twice a month.

Government spending creates jobs in roughly equal numbers to the private sector jobs that would have been created with the money otherwise. Thus, no net gain. Also, the idea about the number of people spending money is just completely wrong. In fact, the few rich people spending lots of money support tons of jobs.

You say that government does not add to the wealth of a nation. I have to disagree with you there. The problem is that with Taxation government may simply take the money and do as it pleases. We do get some valued services, often at the maximum possible cost, but we tend to get many more of the valueless services at the maximum possible cost.

So I shall give you an example of how public finance should work in creating wealth in the neighborhood.

@@@@

Let us say we have a paved road in a community. It has a big hole in it. The vehicles on this road hit this large hole leaving them severely damaged. There is a huge cost to the community’s residents in mending damaged vehicles, but not enough damage to any one vehicle to induce the owner to fix this hole. Say the cost of vehicle repair is $3000 and the cost to repair the hole is $6000. Say 30 cars are damaged causing $90,000 in increased transportation costs on a daily basis.

How does the market system fix this hole when no one person will pay to fix this hole?

Now, what is the daily cost of leaving this road unrepaired for the residents of that community or what is the benefit of repairing that road for the residents of the community?

It looks like the cost is $90,000 to the community in not fixing the $6000 hole.

So, is there a financial benefit for the citizens of this community banding together to fix this hole?

You admit that most of what government does is negative and then try very hard to concoct an example to disprove me. Nice try and I appreciate the comment, but you missed one thing. The people who pay $3,000 each to have their cars fixed create new wealth for machanics and parts suppliers equal to what they lost. Thus, the pothole was not destroying wealth, only redistributing it. When government fixes it, drivers are happy but mechanics are not.

economart (Gary Marshall) provides “…an example of how public finance should work…in the neighborhood…,” describing a situation in which citizens’ individual costs are insufficient to compel any one of them to fix a shared problem. The particular example concerns a pothole that causes substantial accumulated damage, when all cars are considered, but not enough damage to any one car to justify one owner paying for the whole pothole repair. ____________________

The example makes excellent sense to me. Different levels of groups work together to solve similar kinds of problems. Those groups may be the PTA, the church group, or city or state government, or the Federal government. The principal of cooperative action is the capitalistic key here. ____________________

For some people, our Federal government is just the evil force of “them,” who take our money from us and use it for whatever “they” want. But the true role of our government is to represent US. “We, the people.” The Federal government is our largest size of PTA or church group. It works together to solve those problems that affect the whole of us. ____________________

Does government often do a lousy job? Heck, yeah. I think anybody would agree with that.

But is an absence of government mistakes—if that means an absence of government—a better thing?

No matter our flaws, I’ll take America, with our flawed government “of and by and for the people,” over anything else. ____________________

Thanks to Gary Marshall for a clear and seemingly indisputable example of the optimum role of government.

I have a great respect for your efforts at Forbes. You are one of the few economists or economic thinkers on this site that I admire because you fight for market principles and practices. However, you have erred in one of your claims. I shall demonstrate the error. Once you see it, then you shall have all the more ammunition with which to defend your present beliefs and ideas. This is not a defeat. It’s a victory. My correction confirms your ideas and convictions rather than contradicts them.

What you have said is contrary to a theory in public finance that I have been working on for some years now. I currently offer $100,000 to any who can find the flaw in a rather startling proof of mine. The proof demonstrates that there is no difference to the finances of a community were it to tax or borrow from its residents to fund public expenditures. However, Taxation possesses great costs that one does not find in borrowing. Crucial to this theory is the idea that the community through its contractor, the government, can fund certain expenditures that will produce returns above all costs.

I did not say that government cannot operate with an eye to costs and benefits in public expenditures. What I said is that under present conditions, that government can just take the money of others without justification by way of Taxation, it rarely does. Thus, we see the atrocious and limitless squander of government throughout the nation. Change those conditions, and government will justify every expenditure it makes on behalf of the community. We have not yet changed the conditions, but soon we shall. And what an explosion in wealth the nations and peoples of the world shall discover.

I asked you for your analysis on the street repair problem. You came back with the ‘broken windows’ response that Keynesians love to parade about, which I find strange given what articles of yours I have read. You may have already noticed this. The funds that the vehicle owners must hand over to the garage owners is disposable income, or profit if you will. It is $100,000 per week that could go to save, invest, retire debt, or consume. It is money above all costs of operations for businesses and households.

With the hole in the road, those businesses and households must divert these profits to mending damaged vehicles. Their costs of living or operating have risen. But the funds forgone are not pure profit to the garage owners. They must buy parts and materials and perhaps hire new staff to meet the increased demand for their services. The resources of the community in labour and materials are diverted from worthy economic pursuits to unworthy economic pursuits, increasing costs for every business and individual. This results in a poorer community.

A $6000 repair to the hole would save the community $100,000 per week in costs.

Now imagine the Keynesian advocating for new, needless, and excessive government regulations that increase costs for businesses. The firms must hire new staff for their manufacturing operations. The costs of manufacturing a good rises forcing the consumer to pay more or the business to accept less for the product.

Its no different from employing a fellow to dig a hole in the morning and fill it up in the afternoon. The costs of production rise without any increase in output or supply. Demand rises for the goods of the community because a fellow has a job. However, he adds nothing to supply, meaning he is a burden rather than a benefit.

Wind energy follows exactly the same line. Labour, investment, and materials diverted from producing valued goods to producing worthless goods greatly harming the finances or inflating the costs of a community. Great costs for a negligible increase in energy supply.

My point is that Government can produce valued goods. However, in a climate of Taxation, it rarely does. Abolish Taxation and institute public borrowing, then it generally shall. It shall fix the roads bringing down the costs of transportation, assist in the education of children greatly enhancing their knowledge and incomes, establish police forces and courts to limit crime and keep insurance rates for homes and businesses affordable, treat and distribute water erasing waterborne diseases and diminishing cooking costs, hold government squander to a minimum by implementing cost and benefit analysis in all expenditures , and enhance the wealth of the community.

Thanks for the kind comments. I see you agree on the lousy efforts that government makes in spending taxpayers’ money. There is a sublime remedy to that great failing. Its funding public expenditures by borrowing from the community and abolishing all Taxation. Crazy, huh?

The proof below demonstrates that it doesn’t matter to a community whether that community funds public expenditures by Taxation or Borrowing. However, Taxation comes with costs in deterrence and in government squander that are not found in Borrowing. So a community is better off funding its public expenditures by borrowing.

There is $100,000 on offer to any who can find the flaw. Enjoy.

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The costs of borrowing for a nation to fund public expenditures, if it borrows solely from its resident citizens and in the nation’s currency, is nil.

Why? Because if, in adding a financial debt to a community, one adds an equivalent financial asset, the aggregate finances of the community will not in any way be altered. This is simple reasoning confirmed by simple arithmetic.

The community is the source of the government’s funds. The government taxes or borrows from the community to pay for public services provided by the government.

Cost of public services is $10 million.

Scenario 1: The government taxes $10 million.

Community finances: minus $10 million from community bank accounts for government expenditures. No community government debt. No community government IOU.

Scenario 2: The government borrows $10 million from solely community lenders at a certain interest rate.

Community finances: minus $10 million from community bank accounts for government expenditures. Community government debt: $10 million; Community government bond: $10 million.

At x years in the future: the asset held by the community (lenders) will be $10 million + y interest. The deferred liability claimed against the community (taxpayers) will be $10 million + y interest.

The value of all community government debts when combined with all community government IOUs or bonds is zero for the community. Theoretically, at some point in the future, the government may collect taxes from the community, i.e. the taxpayers, and simply hand them back to the community, i.e. its lenders, erasing the acquired community government debts and assets.

In conclusion, if a community borrows from its own citizens to fund worthy public expenditures rather than taxes those citizens, it will not alter the aggregate finances nor the wealth of the community. Adding a financial debt and an equivalent financial asset to a community will cause the elimination of both when summed.

Whatever financial benefit Taxation possesses is nullified by the fact that borrowing instead of Taxation places no greater financial burden on the community.

However, the costs of Taxation in government squander and in deterrence are immense. By ridding the nation of Taxation and instituting borrowing to fund public expenditures, the nation will shed all those costs of Taxation for the negligible fee of borrowing in the financial markets and the administration of public debt.